The SECURE Act was passed in December 2019, and new rules went into effect on Jan. 1, 2020 that affect retirement savings.
13 ON YOUR SIDE spoke to Advance Capital Management who shared some highlights of the act, and how it can affect you.
The required minimum distribution starting age has increased to 72.
Previously, the starting age for required minimum distributions was 70.5. Under the new law, those required minimum distributions begin when you turn age 72. The law applies to those who turn 70.5 in 2020 or later. So, those who turned 70.5 in 2019 still must follow the old rules and begin taking distributions by April 1, 2020.
The Stretch IRA has been eliminated.
One of the most notable parts of the new law is the elimination of the stretch IRA strategy. This allowed non-spouse beneficiaries to draw down an inherited IRA over their lifetimes. Non-spouse beneficiaries are now required to withdraw all the funds from an inherited IRA within 10 years of the original account holder’s death. The shorter window in which beneficiaries must deplete the account could result in unwanted tax bills, if not properly addressed. Exemptions are made for spouses, disabled or chronically ill beneficiaries, minor children and those who are not more than 10 years younger than the original account owner.
The age restriction for contributions has been lifted.
People who choose to work after the age of 70.5 can now still contribute to a traditional IRA. This is a positive change in a country where people are continuing to work longer.
Annuities will now be offered in retirement plans.
New changes in the law make it easier for employers to offer annuities in their retirement plans. The option of a guaranteed lifetime income investment isn’t inherently bad. But the language in the law opens the door for the inclusion of more complex and higher cost annuities. Most retirement savers can do well without purchasing an annuity. Considering the various rules and fees involved, be sure you understand how annuities work and get an objective opinion from a financial advisor before buying one.
Parents can now withdraw up to $10,000 from a retirement account without penalty from retirement accounts for the birth or adoption of a child.
In the year of the birth or adoption of a child, each parent can take penalty-free early withdrawals (taken before age 59 ½) of up to $5,000 from their retirement accounts. However, income taxes still apply. (You may repay the funds back to the account later, but the rules surrounding this option are still unclear.) This can provide some welcome relief, especially for working parents. Still, retirement funds should be used for retirement.
529 Funds can now be used to repay student loans.
Traditionally, 529 plans were limited to qualified higher education expenses. That includes tuition, fees, textbooks, and the like. A provision of the SECURE Act allows a lifetime maximum amount of up to $10,000 to be used to repay student loans for the account beneficiary. An additional $10,000 may be used to repay student loans for each of the beneficiary's siblings. However, if you use money from a 529 plan to pay down student loan interest, you cannot deduct that interest as an above-the-line deduction.
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